Source: IBFD Tax Research Platform News
The Inland Revenue Department (IRD) has updated the administrative guidelines on the tax treatment of royalties and other income derived from intellectual property (IP). The guidelines set out in detail the deeming provisions for IP-related income, guiding principles used in determining the source of royalty income, use of the appropriate deemed profit rates and the application of treaty tax rates.
The latest guidelines as provided in the Departmental Interpretation and Practice Note (DIPN) No. 22 (revised) are summarized below.
- The latest changes to the relevant legislative provisions deem certain sums derived from IP to be sourced from Hong Kong and subject to profits tax (i.e. the deeming provisions), such as sums for the use of intellectual property outside Hong Kong and for the assignment of a performer's right in relation to a performance in Hong Kong, as well as the introduction of a new provision on the taxation of sums attributable to value creation contributions in Hong Kong.
- The broad guiding principle used to determine the source of royalty income is to see what the person has done to earn the profits in question and where the person has done it. The following situations are analysed when applying the principle:
- totality of facts;
- licensing of IP created or developed by licensor;
- licensing of IP purchased by licensor; and
- sublicensing of IP.
- The following scenarios are analysed when applying the deeming provisions:
- exhibition or use of cinematograph films, etc. in Hong Kong;
- use or right to the use of patents, trademarks, etc. in/outside Hong Kong;
- use or right to the use of IP generated from research and development activities in Hong Kong;
- use or right to the use of IP with value creation contributions in Hong Kong; and
- assignment of performer's right.
- The application of the 30% and 100% deemed profits rate when computing the assessable profits are explained accordingly. Briefly, the assessable profits are deemed to be 30% of the sum received or accrued except where the IP was previously "owned" by a person carrying on a trade, profession or business in Hong Kong and the sum is paid or accrues to an "associate". In the latter case, 100% of the sum paid or accrued is taken as the assessable profits. The purpose of deeming 100% of the sum as assessable profits is to counter avoidance schemes that involve arrangements with overseas associates.
- The rate specified in the royalties article of the relevant tax treaty will apply where the recipient is the beneficial owner of the royalty income, unless the business profits article applies. However, treaty benefits will not be applicable if the general anti-avoidance or specific anti-avoidance provisions are invoked.
DIPN No. 22 (revised) replaces the previous DIPN issued in January 2005 and the full details are available here.
Report from Ying Zhang, Senior Associate, IBFD